Rising profits, market share could take Maruti to 10,000

Maruti Suzuki has said it would make 1.7 million units in FY18.India's biggest car-maker did itself a world of good by matching its earlier record on operating margins at 17 per cent.

The upward trend in profitability and a robust market share locally should fetch Maruti Suzuki more upgrades from cautious analysts, and vault the stock's target price beyond five figures.

Its premium valuation does not appear to have deterred CLSA from raising the target to Rs 10,000 from Rs 9,230, after the September 2017 results.

The operating margin of Maruti Suzuki expanded 360 basis points to 16.9 per cent in the second quarter, beating estimates of 14.5-15.5 per cent.

Higher-priced cars and zero discounts undergirded the profitability. The share of volume of models with a waiting period increased to 38 per cent of the total, compared with 28 per cent in the previous quarter, helping Maruti offset the impact of rising input expenses.

The average discount per vehicle in the September quarter fell to Rs 15,200 per vehicle from Rs 16,100 in the previous quarter. The average discount level dropped to 3.5 per cent of the average selling price (ASP) from the peak of 5.6 per cent a couple of quarters ago.

Besides, the ratio of other expenses to revenue fell 190 basis points on a sequential basis.

There is more room for margin expansion even though the new Gujarat plant is yet to reach full capacity. The Gujarat plant added 34,000 units to the total sales volumes in the second quarter, compared with 24,000 units in the previous quarter.

The company management indicated that the Gujarat plant volumes will reach 20,000 units per month in the last quarter of FY18.

The lower localisation contents of the new plant and lower capacity utilisation will impact the profitability of the company in the near term. The Street has been pricing operating margins of 15 per cent-15.5 per cent in the next two fiscal years.

On the volume side, the company's guidance appears to be conservative. Maruti Suzuki has said it would make 1.7 million units in FY18.

Maruti is likely to surpass its guidance comfortably on the basis of the first half production run rate, and should make 1.74 million vehicles. The Street has priced in volumes at 1.74-1.8 million for the current fiscal year.

The stock is trading at 25 times its projected FY19 earnings, at a valuation level that appears rich. But the premium valuation is likely to sustain because of higher earnings visibility, and a strong franchise.